All that Glitters — Mortgage Notes

GDP growth in the second quarter was a measly 1.0%, only slightly better than the 0.4% of the first quarter (August 26 MarketWatch)

Consumer confidence plunged but spending was up in July by 0.8% (August 30 Wall St. Journal)

The unemployment rate is expected to stay above 8% through 2014 according to the Congressional Budget Office (CBO). They estimate that the deficits will total $3.5 trillion, but make the goofy assumptions that tax cuts will expire and Medicare fees to doctors will be reduced (August 25 Wall St. Journal)

REAL ESTATE HIGHLIGHTS OVER THE PAST WEEK

The average home declined in value by nearly 6% over the past year, though was up by 3.6% in Q2. Since the Summer 2006 peak, average price decline is 32% nationwide. (Case Shiller)

New privately owned housing starts are the lowest in recorded history, going back to the 1950’s (Dept. of Commerce)

6.54 million loans are either delinquent or in the foreclosure process (Sept. 1 Dr. Housing Bubble)

Almost all of the economic and financial news these days is gloomy. I closely follow all of it both because I’m interested and because that news can directly impact my mortgage notes business.

Real estate prices and sales continue to drop due to economic uncertainty, high unemployment, and lots of shadow inventory held by banks. Even though interest rates are near historical lows, potential home buyers (buyers of mortgage notes too) either don’t have enough money to buy or are too nervous about the overall economic situation to make such a big move. Real estate investors continue to gobble up properties in many areas, but those actions carry risks of their own. Really, there are no safe investments these days, and the temptation is just to park all of the money in a bank savings account, gathering 0.5% interest or less.

Gold has had a great run-up in price. According to Goldprice.org (as of Sept. 2), gold is up almost 10% over the last 30 days, nearly 46% for the past year, and over 191% since September 2006. Those are amazing returns for any investment, and I only wish that I had followed my gut and purchased gold a couple of years ago. Alas, I did not.

Even at current prices of well over $1800/ounce, my instincts tell me that gold is still a buy, though obviously with higher risks for a fall the higher that it goes. Investing on increasing gold prices is a bet that the Fed and Congress will continue to devalue the U.S. dollar and make bad decisions. Over the past few years, that’s been a safe bet as the U.S. debt has soared into the stratosphere. With elections coming up in just over a year, it is unlikely that the situation will change.

Gold is a more pure investment than stocks and even real estate, as Congress and Wall St. have less ability to affect gold. The stock market has become a place for speculators, and always feels to me like a game that is rigged in favor of the big banks. One can make or lose a lot of money in the volatile market, though amateurs are most likely to lose their shirt than make millions of dollars. Of course, gold is also speculative and volatile, but lately has been closely correlated with bad government programs and spending.

Maybe I’m just a chicken, but I’m still holding off on buying gold because of the risk. I do see more upside than downside, but a big fall could still be dramatic. Perhaps I’ll write another article about gold in a year wishing that I had bought at $2500/ounce!